oversight

Need for Fairer Treatment of Homeowners' Claims for Defects in Existing Insured Homes

Published by the Government Accountability Office on 1977-07-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          DOCUMENT EBSUHE
 02855 - [A2093196]

 Need for Faicer Treatment of Homeowners' Cldims for Defects in
 Existinq Insured Hones. CED-77-97; B-114860. Jujy 27, 1977. 21
 pp. + 2 appendices (5 pp.).

Report to the Congress; by Elmer B. Staats, Comptroller General.
Issue Area: Domestic Housing and Community Development: Housing
    for Low and Moderate Income Families (2101); Domestic
    Housing and rcsmunity Development: Federal Credit Incentives
    to Stimulate Housing (2104).
Contact: Community and Economic Development Div.
Budget Function: Community and Regional Development: Community
    Development (451).
Organization Concerned: Department of Housing and Urban
    Development.
Congressional Pelevance: House Committee on Banking, Currency
    and Hrusing; Senate Committee on banking, Housing and Urban
    affairs; Congress. Rep. Ralph H. etcalfe.
Authority: National Housing Act, as amended, sec. 518(b) (12
    U.S.C. 1735b(b) (Supp. V)); S. 4368 (92nd Cong.). National
    Housing ct, sec. 235 (12 U.S.C. 1715z). National Housing
    act, sec. 203 (12 U.S.C. 1709). National Housing Act, sec.
    221 (12 U,S.C. 17151). Housing and Community Development Act
    of 1974. Emergency Housing ct of 1975. Housing
    Authorizatior Act of 1976.

          Homeowners in Chicago who purchased homes with major
defects have been treated unfairly and inconsistently by the
 Department of Housing and Urban Development (HUD) in their
efforts to seek compensation. Ambiguous criteria for evaluating
claims and only partial reimbursement were the major
deficiencies of the compensation program. Findings and
recommendations to rectify the situation are applicable
throughout the country. Findings/Conclusions: Better criteria
are needed to evaluate the validity of claims. A number of
rejected claims are similar to claims considered valid.
Homeowners were not always informed of the right to appeal
rejected claims. Incorrect partial compensation for valid claims
was sometimes granted. Recommendations: HUD should more clea-lv
define criteria as to what constitutes a serious defect.
Guidance given inspectors to determine whether defects existed
at the time of insurance commitment should pount out the
inappropriateness of relying (1) solely on a fixed time limit
without regard to other factors in each case, or (2) on the
original Federal Housing Administraton appraisal. BUD should
direct the Chicago area office to discontinue using a fixed
time-limit criterion to the exclusion of other factors, resolve
serious doubts in favor of the homeowner in evaluating claims,
and reevaluate all claims rejected on the basis of inappropriate
criteria. Procedures for reimbursement should cover total actual
costs, includiny finance charges, and should be implemented in a
uniform and consistent   anner.   (DJf)
      REPORT TO THE CONGRESS
U'%


      BY THE COMPTRO LLER G(ENET'AL
      OF TIlE UNITED) STA TES




      Need For Fairer TreatmenL Of
      Homeowners' Claims For Defects
      In Existing Insured Homes
      Department of Housing and Urban Development

      While this report is directed at a situation in
      Chicago where homeowners have been treated
      unfairly and inconsistently under a De
      partment of Housing and Urban Development
      program, a number of GAO's findin-os, con
      clusions, and recomit,,endations to correct thc
      situation are applicable throughout the
      Nation.

      !n Chicago, homeowners were tceated unfairly
      and inconsistently under a departmental pro
      gram to compensate them for major defects
      affecting the use and livability of existing
      homes pu ichased with federaliy insured
       ; or tages.

      Lack of cleatly defined criteria for evaluatilng
      the acceptability of homeowner clainls fot as
      sistane have resulted in inconsistent ciepart
      mental determinations thaa frequently wvver
      reversed when homeowners appealed th (id,
      cisions. Also, Chicago hor,eowners were ,ut
      fully reimbursed for defects, as prescrii)edl t)y
      dep-rtmental   regulations.


      CED-77-97
                                                          JULY 27, 1977
              COMPTROU.ER GENERAL OF THE UNITED STATES
                         WASHINGTON. D.C. 2054




B-114860




To the President of the Senate and the
Speaker of the House of Representatives

     This report discusses the need for fairer treatment of
homeowners' claims by the Department of Housing and Urban
Development under a program designed to compensate homeowners
for defects in existing insured homes.

      We made our review at the specific request of Congress-
man Ralph H. Metcalfe of Illinois, and we testified on it
before the Subcommittee on Manpower and Housing, House Commit-
tee cn Government Operations, in hearings held on April 15,
1977.   Because of the national applicability of many of our
findings, conclusions, and recommendations, and because of
considerable congressional interest in the program, we de-
cided that this report should be issued to the Congress as a
wnole.

     Copies of the report are being sent to the Director,
Office of Management and Budget, and the Secretary of Housing
and Urban Development.




                                   Comptroller General
                                   of the United States
COMPTROLLER GENERAL'S                    NEED FOR FAIRER TREATMENT OF
REPORT O THE CONGRESS                    HOMEOWNERS' CLAIMS FOR DEFECTS
                                         IN EXISTING INSURED HOMES
                                         Department of Housing and
                                           Urban Development

            DIGEST

            Chicago area homeowners have been treated un-
            fairly and inconsistently under tho DeDartment
            of Housing and Urban Development's program to
            compensate homeowners for major defects affect-
            ing the use and livability of existing homes.
            Under section 518(b) of the National Housing
            Act, as amended (12 U.S.C. 1735b(b)), the
            Deparcment administers a program to correct
            or compensate owners of existing homes pur-
            chased with federally insured mortgages in
            which there were serious defects at the time
            of insurance commitment.

            Although this review was directed primarily
            toward the administration of the program ill
            the Chicago area, GAO is making recommenda-
            tions aimed at bringing about more objective
            and consistent evaluations, nationwide, of
            homeowner claims as well as correcting prob-
            lems in Chicago. Nationwide, the Secretary
            of Housing and Urban Development should
            --direct that more clearly defined criteria
              be developed as to what constitutes a
              serious defect,
            -- direct that the guidance provided to in-
               spectors for determining whether defects
               existed at the time of insurance commit-
               ment recognize the inappropriateness of
               relying (1) solely on a fined time limit
               without considering other factors of each
               case, or (2) on the original Federal Hous-
               ing Administration appraisal, and
            -- obtain assurance that all departmental
               field offices are making payments for
               claims in accordance with established
               procedures. (See pp. 16 and 20.)
            The Secretary should direct the Chicago
            area office to

TelA s.     Uon rmoval, the report
cover de   hould e noted hreot.      i                   CED-77-97
-- discontinue using   fixed, time-limit crite-
   rion without considering other pertinent fac-
   tors and, rather than relying on original
   Federal Housing Administration appraisals, be
   fair and objective, and resolve serious doubts
   in favor of the homeowner in evaluating claims,

-- reevaluate all claims it has rejected on the
   basis of such inappropriate criteria, and

-- pay future claims in accordance with estab-
   lished procedures as well as reevaluate all
   claims paid to date in terms of these proce-
   dures.  (See pp. 16 and 20.)

GAO expresses go opinion on the legality or
illegality of the Department's operations in
this rport.   Litigation by an association
that includes ~numerous community groups in
Chicago is pending.   (See p. 1.)

Because criteria governing the program are
vague in terms of identifying what constitutes
an eligible defect, or how to determine tnat
the defect existed at the time of insurance
commitment, area office inspectors end re-
viewing officials are forced to exercise
considerable judgment in interpreting and
evaluating claims.  As a result, decisions
rejecting homeowners' claims have at times
been based on inappropriate criteria, and
denials of claims have been overturned during
the appeals process at about a 45 percent rate.
(See pp. 9 and 10.)

The high rate of rejected claims which are
appealed successfully is attributable to

-- the fact that serious structural dete-ts were
   not defined adequately (see p. 10),

-- inappropriate reliance on the Department's
   appiaisal/inspections made at the time of
   irsurance commitment (see p. 11), and

-- the use of a preset time limit on the emer-
   gence of defects to the exclusion of other
   pertinent factors.  (See pp. 12 and 13.)




                     ii
         Not all homeowners have appealed rejected claims.
         Many of these claims appear similar in circum-
         stances to those appealed successfully.  (See
         p. 14.)

         Homeowners also were not being fully eimbursed
         as prescribed by the Department's regulations.
         About one-third of the claims checked by GAO
         had been underpaid because the Chicago area
         office had reimbursed the homeowners on the
         basis of average replacement cost rather than
         actual cost.  (See p. 18.)

         Cost of the program since its inception through
         January 1977 was about $18.5 million with 22,100
         payments having been made,  From April 1975
         through January 1977 about 76,800 claims were
         received nationally with 13,900 (or about
         18 percent) found valid and acceptable for
         reimbursement.  The Chicago area office received
         about 13,200 claims from April 1975 through
         February 1977 and has judged 2,500 (or 19 per-
         cent) of them to be valid.  (See pp. 6 and 7.)

         AGENCY COMMENTS AND GAO'S EVALUATION

         The Department agreed with most of GAO's recom-
         mendations and indicated that actions have
         been or are being taken in response to them.
         (See pp. 22 through 25.)

         The Department disagreed with GAO's recommenda-
         tion that criteria concerning what constitutes
         a serious defect should be more clearly defined.
         The Department said that guidelines should not
         be too restrictive in order that benefit of any
         doubt should be given to homeowners.  Also, the
         Department pointed out the difficulty in provid-
         ing guidance covering every situation. GAO
         recognizes some of these limitations; however,
         it points out that the guidelines could have
         been, and should be, strengthened to reflect
         the experiences of the earlier years of the
         program in terms of eligible defects.  This
         would add an element of consistency within
         and among the Department's field offices as
         they consider the merits of each claim and
         would result in fairer treatment of homeowners.
         (See pp. 16 and 17.)




tI Sat                        iii
                           Con      tents


LIGEST                                                            i
CHAPTER

       1    DESCRIPTION AND STATUS OF SECTION 518(b)
              HOMEOWNER ASSISTANCE PROGRAM                     1
                Background                                     1
                Criteria and procedures used ir.
                  evaluating caims and appeals                3
                Section 513(b) program statistics             6
                Scope of review                               8

      2     ACTIONS NEEDED TO INSURE EQUITABLE TREAT-
              MENT TO HOMEOWNERS SUBMITTING CLAIMS
              UNDER SECTION 518(b)                            9
                Appeal statistics                             9
                Need for better criteria in evaluating
                  the validity of claims                     10
                Claims not appealed which are similar to
                  claims reconsidered valid                  14
                Homeowners not always informed of right
                  to appeal                                  15
                Conclusions                                  15
                Recommendations                              16
                Agency comments and our evaluation           16

      3     VALID HOMEOWNER CLAIMS NOT F LLY REIMBURSED      18
                Incorrect compensation of Cicago
                  homeowners                                 18
                Conclusions                                  20
                Recommendations                              20
                Agency comments                              20
 APPENDIX

      I     Letter dated May 17, 1977, from the Assist-
              ant Secretary fcr Housing-I"ederal ousing
              Cummissioner, DepaLtment of Housirg and
              Urban Development                              22

  II        Principal HD  officials responsible for
              administering activities discussed in
              this report                                    26

                           ABBREVIATIONS

FHA         Federal Housing Administration

HUD         Department of Housing    and Urban Development
                           CHAPTER 1

             DESCRIPTION AND   sTATUS OF SECTION 518(b)

                   HOMEOWNER ASSISTANCE PROGRAM

      In accordance with a March 30, 1976, request of
Congressman Ralph H. Metcalfe and subsequent discussions
';th his ofice, we reviewed the activities of the Chicago
ctrea oficef of the Department of Housing and Urban Develop-
ment (HUD) concerning its operation of section 518(b) of the
National Housing Act, as amended [12 U.S.C. 1735bib),
(Supp. V, 1975)].   Specifically, we

     -- obtained statistical data on   c program, such as
        the number of applications received, accepted, modi-
        fied (accepted in part), or rejecteg;

     -- identified the criteria used to evaluate the eligibil-
        ity and validity of program applications, including
        any local modifications made to the criteria, and

     -- reviewed samples of rejected applications which have
        and have not been appealed to contrast HUD's final
        determinations for each.

     On March 16, 1976, the MetLopolitan Area Houzing
Alliance, an unincorporated association that inrludes num-
erous community groups in the Chicago area, filed a class
action complaint in the United States District Court for
the Northern District of Illinois against the Secretary of
HUD and other HUD officials.  The complaint challenges the
procedures utilized by HUD to implement the section 518(b)
homeowner assistance program in Chicago.  The plaintiffs
maintained that the program's various procedural irregulari-
ties are violations of the National Housing Act and due
process of law as guaranteed by the Fifth Amendment to the
U.S. Constitution.  On June 6, 1977, te Government's motion
for summary judgment was partially granted with other issues
remaining.  Tnis report expresses no opinion on the legality
or illegality of HUD operations.

BACKGROUND

     Section 518(b) of the National Housing Act--a homeowner
assistance program--was enacted on December 31, 1970, to
correct or compensate owners of existing homes for structural
or oher defects that seriously affect the use and livabilty
of any single-family dwelling covered by a mortgage insured
under section 235 (12 U.S.C. 1715z) of the same act.  Some of
the conditions for compensation stated that the defect must


                                 1
have existed on the date of insurance commitment
                                                  and that it
be one which a proper inspection could reasonably
                                                   disclose.
Also, the homeowner must have requested assistance
                                                    not later
than 1 year after the mortgage was insured.

     The section 518(b) program was modified by the Housing
and Community Development Act of 1974 and the Emergency
                                                        Hous-
ing Act of 1975 to

     -- include two-, three-, and four-family dwellings,
                                                             in-
        stead of just single-family dwellings;

     -- include homes located in older, dlininq urban
                                                         areas
        covered by mortgages insured under sections 203 and
        221 of the National Housing Act (12 U.S.C. 1709 and
        1715X, respectively) between August 1, 1968, and
                                                          Jan-
        uary 1, 1973;

     -- correct only such defects which seriously affect
                                                         use
        and livability by creating danger to the life or
        safety of the inhabitants; and

     -- extend the deadline for filing applications for
        assistance under sections 203 and 221 to March 22,
        1976.

     More recently, the Housing Authorization Act of 1976
extended the deadline for filing section 518(b) claims
                                                        under
sections 203 and 221 to December 3, 1976.  It also established
a section 518(d) which provides coverage similar
                                                  to that cited
in section 518(b) to homeowners with mortgages insured
sections 203 and 221 on or after January 1, 1973,       under
                                                   but prior
to August 3, 1976.  The homeowner ust request assistance
under section 518(d) by August 3, 1977.

     The mortgage insurance sections of the National
                                                     Housing
Act affected by section 518(b) and 518(d) programs
                                                   are sum-
marized below.

     -- Section 203 provides mortgage insurance to help
                                                         home-
        buyers purchase new or existing one- to four-family
        dwellings.   It is the basic and most commonly used
        program.   Any individual can participate in the pro-
        gram if he or sh- has a good credit record and can
        demonstrate an ability to make required investment
        and mortgage payments.
    -- Section 221 provides mortgage insurance for the
                                                        ur-
       chase of homes by families displaced by Government
       action and by families with low- or moderate-ircomes.
       While there are no specific income requirements for
       eligibility, low mortgage limits available under
                                                        this
         program tend to restrict its use to families with lower
         incomes.

        --Section 235 helps lower income families become home-
          owners b providing mortgage insurance and subsidizing
          portions cf the monthly payments due under the mort-
          gages.   o be eligible for assistance, the family must
          have an adjusted income not exceeding 95 percent of the
          median income of the area.

     Responsibility for processing, evaluating, and resolving
section 518(b) claims was delegated to HUD field offices.
Procedures or processing the claims were included in a
handbook which, among other things, provided for establishing
the (1) eligibility of a claim based on statutory require-
ments, and (2) alidity of a claim based on inspection re-
sults or other applicable criteria.  The handbook was most
recently revised .n September 1976.

CRITERIA AND PROCCDURES USED IN
EVALUATIG CLAIMS PND APPEALS

     A honeowner's claim under the section 518(b) program is
screened first for eligibility and then for validity after
its submission to UD.   If the claim is rejected for either
eligibility or validity, the homeowner has the right to ap-
peal the decision and ask for a reconsideration.  The criteria
and ,rocedures o be used in. making these various determina-
tions were established by HUD headquarters for use by its
field offices.  Wt found no evidence of ne Chicago area
office altering or  odifying the eligibility criteria. Weak-
ne ses found in the criteria used in making validity deter-
minations will he      iscLssed   in cnapter   2.

Claim     liqibility

     A nomeowner's claiin for assistance under the sec-
tion 518(b) program is initially screened for eligibility
to determine if it meets the following statutory require-
ments:

        -- Tne home must be a one- to four-family dwelling.

        --The home must be more than 1-year old on the date of
          the issuance of the insurance commitment.

    -- For a section 235 home, the owner must have requested
       assistance not later than 1 year after the mortgage
       was insured or by December 31, 1971, if the mortgage
       was issued before December 31, 1970.



                                   3
     --A section 203 or 221 home must be in an older, declin-
       ing rban area; the mortgage must have been insured on
       or after August 1, 1968, but prior to January 1, 1973;
       and the homeowner must have applied for assistance on
       or before December 3, 976.
      Section 518(d) extended the period of coverage for homes
with mortgages insured under sections 203 and 221 from Janu-
ary 1, 1973, to August 3, 1976. These homeowners must request
ass:istance under section 518(d) by August 3, 1977.

     Of the eligibility criteria, the criterion that the
home be located in an older, declining urban area is the
only one involving any degree of subjectivity.  In implement-
ing the statutory provision governing this matter, HUD head-
quarters determined that an older, declining urban area was
a community with a population of 2,500 or more (the
definition of urban) in which at least 50 percent of census
                                                      the
dwellings w re built before 1940.

      HUD instructions provid? that when the census tract
data indicates an ineliqible location, the claimn must be
field inspected to determine the accuracy of the data.
Chicago area office personnel visited areas presumed to be
ineligible by the census tract data and identified those
areas within the tract that actually could be classified
as older and declining. The area office maintained a map
of ithese eligible areas within the ineligible census tracts.

     As shown in the table on the bottom of page 7, the
Cnicago area office rejected 3,920 claims, or about 30 per-
cent of the claims it hd processed, on the basis that they
were ineligible. We examined 100 ineligible claims and found
the following reasons were given for the rejections:

           Reason for rejection                   Number
Property not located in older, declining
  urban area                                         59
Property not insure9 by HUD within statutory
  timeframes                                         34
Claim n.ot submitted within statutory time-
  frames                                              8
Property not insured by HD                            1
   T tal                                         a/102
a/Two of the claims were rejected rtr two rasons each.




                                  4
t ..e
    fact that properties were not located in older, declining
urban areas was primarily why claims were determined to be in-
eligible. While this criterion is more subjective than the
others, we found nothing to suggest that the Chicago area
office had altered or modified it.  The same holds true with
regard to other eligibility criteria.

Claim validity

     After a claim is determined to be eligible, it is as-
signed to a field inspector who inspects the defect or exam-
ines documentation and other evidence showing correction of
a defect, and renders a judgment as to the validity of the
claim.  The inspector evaluates the claim according to the
following HUD validity requirements.

        -- The defect must be a structural or major defect which
           so seriously affects use and livability as to create
           a serious danger to the inhabitants' lives or safet.

        -- The defect must have existed on the date the insurance
           commitment was issued and be one that could be rea-
           sonably disclosed by a proper inspection.

     HUD guidance on what constitutes a structural or major
defect lists the following as being eligible for assistance:
(1) worn-out roofs, (2) seriously defective heating systems,
and (3) rotten porches and steps. To determine the types
of defects for which homeowners were seeking assistance, we
reviewed all April 1975 applications determined to be in-
velid by the Chicago area office and not appealed by the
homeowners. Of the 256 applications reviewed, approximately
90 percent fell within the above three categories--roofs,
heating systems, and porches and steps.

     HUD guidance concerning whether the defect existed
at the time of insurance commitment listed t   judgment of
the field office as the criterion for determining the exist-
ence of the defect when no repair requirements were shown
on the conditional commitment for insurance. The guidance
stated that the test for determining whether a proper in-
spection should have disclosed the defect was whether the
appraiser, operating in accordance with the applicable in-
structions at the time of the appraisal/inspection, should
have observed the defect or anticipated it due to observ-
able conditions.

     Statistics presented in the table on the bottom of page
7 show that the Chicago area office rejected 6,611 claims, or
about 51 percent of the claims it has processed, on the basis
that they were invalid.


                                5
 Appeal   process

      Homeowners have the right to appeal  rejected sec-
 tion 518(b) claims.   If a homeowner chooses to do so, his
 or her claim is appealed to the area
                                       office where it is
 then assigned to an inspector.   The inspector is to reevalu-
 ate the claim and r :ommend to an area
                                         office reconsidera-
 tion committee whether to accept or reject
                                             it again.   Final
 decision within the area office regarding
                                            the appeal rests
 with the reconsideration committee.

      If a decision is reached in the area office
                                                     to over-
 turn the initial rejection and thus accept
                                               the claim for
 reimbursement, then the appeal goes no
                                          further and is handled
by the area office.    If, on the other hand, the area office
continues to consider the claim either
                                         wholly or partially
 invalid, it is then forwarded to the regional
additional consideration.                         office for
                             Until July 1976 the regional office
reviewed the forwarded claim ad either
                                           reversed the area
office's determination or sent its negative
                                                recommendation to
HUD headquarters, which then made a final
                                             decision on the
case.   HUD headquarters originally wanted final
                                                    review au-
thority to insure giving homeowners the
                                           maximum benefit.
However, b   July 16, 1976, there were not many headquarters
reversals of area or regionai office
                                       decisions, and suffi-
cient staff was not   vailable for reviewing cases.
ters, therefore, delegated the final                    Headquar-
                                       decision on appeals to
the regional offices.

SECTION 518(b)      PROGRAM STATISTICS

     Although the program has been in effect
                                              since late 1970,
nationwide statistics developed by HUD
                                        headquarters are lim-
ited to program activities that have
                                      occurred since about
April 1975.  It was at this time that the program
                                                   was sub-
stantially expanded as a result of revisions
                                              to the National
Housing Act in 1974, which authorized
                                       acceptance of home-
owners' claims for defects in properties
                                          insured under
sections 203 and 221.

     HUD's section 518(b) activ:.ty status
                                           report, as of
January 27, 1977, showed that, nationwide,
                                            about 86,500
claims and requests for reconsideration
                                         were received from
about April 1975 to January 27, 1977.
                                        As shown in the
following table, HUD's Chicago regional
                                         office received
39,396 (or about 46 percent) of these claims
tions.
                                             and reconsidera-




                                  6
                                 Reconsid-                                          Claims
                                 eration                                           eligible     Claims
                      Claims     requests             HUD claims determiations      and in     awaiting
 E!o                 [e!enived   received      !rocess T
                                             Total          In        InIIble                 erScesSin
Boston                 3,012        582       3,594      972    1,600      34         38i         5
New York              10,080      2,013      12,093    1,348    7,679    2,945        268        80
Philadelphia           9,715      1,247      10,962    1,278    6,504    2,379        451        20
Atlanta                4,104        363       4,467      289    1,071    3,186         29        22
Chicago               35,253      4,143      39,396    ,,837   18,285   t3,998      2,109       108
Dallas                 3,347        206       3,553      269      903    2,798         27        25
Kansas City            3,187        647       3,834      905    1,450    1,259        108
Denver                   817         47         864      147      381      382          2         5
San Prancisco          5,562 -      191       5,753      458    1,029    4,656         50        13
Seattle               _11746        211       1,957      396      917      569         71        33
    Total (note a)    76 823      I   20     86 473   13899     9l824   32,521      3 513

a/There is a difference of 3,586 claims between the total claims and reconsiderations
  received by UD, and the total claims determined, in process, or awaiting orocessing
                                                                                 4
  by HUD.  The difference is irreconcilable. A HUD official stated that it i at ri-
  butable to periodic inventory adjustments to certain, but not ll, of the pro-essing
  statistics.




     The following table shows the status of claims received
by the Chicago area office from about April 1975 through
February 17, 1977.  The Chicago area office is one of several
area or insuring offices within the Chicago region.  It
should be noted from the table that only 18.9 percent of the
claims received by the Chicago area office have passed eli-
gibility and validity tests and have been accepted for reim-
bursement.  This statistic, however, is comparable to the
18.1 percent of claims received nationwide (76,823) which
were determined to be valid (13,899).

         Status of claims                                 Number                 Percent

Valid (acceptable for
  reimbursement)                                           2,508                   18.9
Invalid                                                    6,611                   49.9
Ineligible                                                 3,920                   29.6
Eligible and in process                                      177                    1.4
Awaiting processing                                           29                     .2

     Total                                                13,245                  100.0

     From April 1975 through January 1977, HUD made 12,173
section 518(b) payments to homeowners amounting to about
$10.9 mllion.   In some cases, two or more payments may re-
late to one claim.  Total cost of the program since its
inception in 1970 through January 1977 was about $18.5 mil-
lion with 22,124 payments having been made.  A breakdown
of program payments by HUD reqional or area offices was not
available.

     Also, requested statistics on the number of claims
modified (accepted in part) were not available at either the
Chicago area office or HUD headquarters.  A Chicago area


                                                      7
office official did advise us, however, that most claims
determined to be valid were only done so partially.

SCOPE OF REVIEW

     Our review was conducted t HUD headquarters in Washing-
ton, D.C., and its regional and area offices n Chicago,
Illinois.  Section 518(b) statistical data was obtained on
a national basis as well as for the two Chicago offices. We
studied legislation incidental to the program and obti-ined
the criteria and procedures HUD uses to carry cut the pro-
gram. To test these criteria and procedures, several samples
of homeowner claims were selected for detailed review. Al-
though not specifically requested to do so, we also reviewed
the accuracy of section 518(b) homeowner reimbursements.
                                    CHAPTER 2

                    ACTIONS NEEDED TO INSURE EQUITABLE

                    TREATMENT TO HOMEOWNERS SUBMITTING

                          CLAIMS UNDER SECTION 518(b'

     Homeowners in the Chicago area who appeal their rejected
section 518(b) claims stand a good chance of having the
rejections overturned. Of the homeowners who have done so
and whose appeals have been processed, about 45 percent have
had their claims either wholly or partially approved. A
look at why so many rejected claims were subsequently found
to be valid disclosed that (1) the criteria used in evaluat-
ing claims have been weak and not very definitive and (2)
the Chicago area office applied timeframe criteria deemed
inappropriate by HUD headquarters or relied on !~he original
Federal Housing Administration (FHA) appraisals in cont a-
vention of its own written instructions.

     Not all homeowners in the Chicago area whose claims
were rejected have appealed, even though some of these claims
appear very similar in circumstances to those which have been
appealed and later determined to be valid.

APPEAL STATISTICS

     Ot    +tie    13,245 claims received by the Chicago area office
from April 1975 through ebruary 17, 1977, 6,611 of them
were determine to be invalid. Of this number 1,677, or
about 25 percent, had been resubmitte' as of February 17,
1977, to the area office in the form of an appeal. Of the
1,411 that have been processed, 637, or 45 percent, were de-
termined to be wholly or partially valid s shown in the
following table.

              Appeal status                 Number      Percent
          Valid                                  84        5.0
          Partially valid                       553       33.0
          Invalid                               774       46.1
          Awaiting processing                   266       15.9
                  Total                      1,677       100.0




                                       9
 NEED FOR BETTER CRITERIA IN
 EVALUATING THE VALfI-TY--F CLAIMS

      Our review indicated that the large number of successful
 appeals is occurring because the criteria used in evaluating
 claims are vaguie in terms of defining (1) what constitutes
                                                             an
 eligible defect or (2) how an inspector is to assure himself
 that the defect existed at the time of insurance commitment.

      We reviewed 47 claims appealed to the Chicago area of-
fice that have been determined to be either wholly or'par-
tially valid and for which reimbursement vouchers had been
prepared at the time of our review.   Thirty-eight   f these
claims were determined valid by the area office.    (Those
determined to be partially valid also received regional and
headquarters concurrence).   Seven of the appeale] claims
were found to be invalid by the area office, but were over-
turned and declared valid at the regional and/or hedquar-
ters level.   The remaining two claims had been appealed only
because the homeowners disagreed with the amount HUD had
agreed to reimburse them.   Both cf these claims were resolved
by the area office in favor of the homeowners.

     Our review of the 47 claims and the determinations the
Chicago area office made disclosed, in part, that (1) struc-
tural cfects have not been adequately defined, (2) there
has been too much reliance placed on original FHA appraisals,
and (3) claims were being both rejected and accepted primar-
ily on the basis of fixed, time-limit criteria with appar-
ently little consideration being given to the other factors
-f each cse.   Each of these situations is discussed below.

Structural defects not
aadequateTy dNTined-

      The section 518(b) inspector is required to evaluate
whether the claimed defect is a structural or major defect
which creates a serious danger to the inhabitants' lives or
safety.   HUD guidance, however, was not specific as to what
constitutes a serious defect.   For example, descriptions
of items listed in the HUD instructions as eligible for
assistance were limted to:   "worn-out" for roofs, "seriously
defective" for heating sstems, and "rottun" for porches and
steps.   From this guidance the inspector was to  etermine
the acceptability of the claimed item as a structural or
major defect.

     From   our sample of reconsidered claims, we found- many
instances   where claims were rejectcd by inspectors be.-
cause, in   their judgment, the defects were not structural or
otherwise   serious enough to endanger the inhabitants' lives


                              10
or safety but were subsequently determined to te valid during
the appeal process. The two following examples illustrate
the subjectivity of he decisions which were reached.

     -- A homeowner submitted a claim fo- replacing the boiler
        in his home. The section 518(b) inspector rejected
        the claim on the basis that a boiler is not a struc-
        tural item. The homeowner appealed and the home was
        reinspected. The second inspector recommended that
        the homeowner be reimbursed because the boiler waL
        not operational during the first heating season, and
        a contractor certified that the original bniler was
        beyond repair. The area office reconsideration com-
        mittee concurred with the inspector's recommendation
        and the homeowner was reimbursed $1,495.

     -- A homeowner requested that repairs be made to the
        front porch of his home. The inspector determined
        that the repairs were eligible but was overruled by
        an area office reviewer who considered the repairs as
        a part of normal homeowner maintenance instead of
        being caused by a structural defect. The homeowner
        appealed. The home was not reinspected, and the area
        office reconsideration committee determined from the
        documentation in the file that the needed repairs
        were ineligible. From the same documentation, HUD
        headquarters determined that the item was eligible.
        Estimated cost to repair the porch was $200.

Inapropriate reliance on
orTijja FFHA appraisals

     Before a mortgage is insured under sections 203, 221,
or 235 of the National Housing Act, an FHA appraisal/
inspection is made to estimate the value of the property
and the feasibility of insuring the loan. Another purpose
of the appraisal is to determine if epairs, alterations,
or additions to the property are necessary to insure pro-
tection of the Government's interest in the transaction.

      Regarding the FHA appraisal/inspection, a 1970 report
by the Senate Committee on Bank'ng and Currency, which
accompanied Senate bill 4368 (the section 518(b) legisla-
tion),   tated that:

     "Information received by the Committee indicates
     that some FHA appraisers have allowed blatantly
     defective homes to be sold to lower income fam-
     ilies under the 235   program.   * * *   The Committee
     feels that HUD should bear the burden of correct-
     ing these defects or compensating the owner for


                             11
     them where HUD employees or agents have made an
     inadequate appraisal and inspection."

     In line with the above statement, Chicago area ffice
guidance to its section 518(b) inspectors directed them not
to attempt to defend the original FHA appraisal but to be
fair and objective, and resolve serious doubts in favor of
the homeowners.

     Nevertheless, 10 of the 47 reconsidered claims we looked
at were rejected on the basis that the original appraisal/
inspection had not disclosed the defect. .For 6 of the 10
claims, area office reviewers had rejected the claims on
this basis even though inspectors had earlier determined
that the claims should be declared valid.

     The following are examples of claims rejected on the
basis of FHA appraisal reports which did not indicate the
existence of the defect at te time of the commitment for
mortgage insurance.

     --A homeowner replaced the heating system in his home
       about 1 year after moving in.   The inspector, after
       reviewing the homeowner's application for assist-
       ance, determined that it was eligible and valid and
       that it should be paid.   An area office reviewer,
       however, rejected the claim because the original FHA
       appraisal report indicated that the heating system
       was acceptable.  The homeowner appealed and the home
       was reinspected.  The inspector recommended that-the
       claimed defect be found eliglible, and the area office
       reconsideration committee concurred with the inspec-
       tor's recommendation.   The mount approved fo- pay-
       ment to the homeowner was $1,118.

     --A homeowner had to repair the furnace in his home
       during the first year of occupancy and then replaced
       it about 1 year from the purchase date.  The inspec-
       tor determined that the furnace replacement was in-
       eligible for reimbursement because it was working at
       the time of appraisal, according to the FHA appraisal
       report.  The homeowner appealed the claim, and al-
       though the home was not reinspected, the area office
       reconsideration committee found the homeowner's claim
       eligible for reimbursement of $968 based on informa-
       tion in the claim file.

Inappropriate reliance on
time-limit-criTeria

     The Chicago area office adopted time-limit criteria
against which the emergence or correction of a defect has


                            12
been applied in determining a claim's validity. Further,
many of the claims we reviewed indicated that this criteria
was applied without apparent consideration being given to
other factors of each case.

     At first, a 1-year limit from the date of commitment
for mortgage insurance was used; later, a 2-year limit was
adopted. To illustrate, in the initial months following the
1974 changes to the section 18(b) program, the Chicago area
office was judging, as valid, claims for reimbursement re-
lating to heating systems lasting only 1 year. Later, the
criterion employed by the area office changed from 1 to 2
years because, according to an area office officia', appealed
claims involving heating systems replaced within 2 years
were being declared valid at the regional and headquarters
level. The area office subsequently adopted the 2-year cri-
terion. We were advised by an area office official that a
similar situation existed regarding defective roofs. We
were also advised that once the heating system criterion had
changed, no attempt was made to review all claims previously
rejected under the more stringent criterion.

     One effect of changing the time-limit criterion has
been the treating of homeowners' claims inconsistently over
the life of the pogram. Many claims rejected in the early
stages of the program are similar in circumstance to claims
accepted for compensaticn in the more recent s ages after
the criterion changed. Also, many homeowners who have
appealed their claims rejected on the bsis o the 1-year
criterion have had their claims reconsiJered valid using the
newer criterion. Those who have not appealed their rejected
claims will not be compensated.

     An official at HUD headquarters told us that it is
inappropriate to apply a steadfast time-limit criterion to
all claims because each claim should be considered individ-
ually and upon its own merit.
     A number of claims we looked at appear to have been
initially rejected and then accepted on the basis of estab-
lished time limits with little regard being given to any
other circumstances of each case. In each case, the claim
was originally rejected because he defect was corrected by
the homeowner more than 1 year after the commitment for
mortgage insurance, but was later determined to be valid
after the area office criterion changed to 2 years.

     The following are a couple of examp.es.
     -- A homeowner submitted a claim for replacing the roof
        on his home. An inspector found the claim invalid


                            13
       because the roof was replaced 2 years after the
       homeowner moved in.  The homeowner appealed, and the
       claim was determined to e valid by the area office
       reconsideration committee because the roof was re-
       placed about 2 years after the homeowner moved in.
       The homeowner was reimbursed $735.

     -- Two homeowners submitted claims for the cost of re-
        placing heating systems about 18 months after pur-
        chasing their homes.  Inspectors found both claims
        invalid, and the homeowners appealed. The homes were
        reinspected during the appeal process, and the inspec-
        tors recommended that the claims be found valid. The
        area office reconsideration committee concurred with
        their recommendations because the repairs were made
        within 2 years of the commitment 'r mortgage insur-
        ance. The homeowners were reimbu. ed $1,300 and
        $1,121.

CLAIMS NOT APPEALED WHICH ARE SIMILAR
TO CLAIMS RECONSIDERED VALID

     Our review disclosed rejected claims which have not
been appealed and in which the circumstances appear very
similar to those surrounding many of the claims appealed and
determined to be valid.  We reviewed 25 such claims from our
April 1975 sample.  Twelve of the 25 appeared to have been
rejected for the same types of reasons as the 47 discussed
previously.

     For example:

    -- A homeowner was notified that his claim for replacing
       the furnace in his home was ineligible for compensa-
       tion because the furnace was acceptable at the time
       of the original appraisal.  His claim was rejected
       even though it had been replaced within 1 year of the
       purchase date of the home, and the inspector had de-
       termined that the furnace was eligible. An area
       office reviewer rejected the claim on the basis that
       the furnace lasted 2 zcating seasons--from December 3,
       1968, to October 15, 1969.

    -- A homeowner was notified that his claim for replacing
       the heating system .. his house was not eligible be-
       cause it was acceptable at the time of the original
       appraisal.  The inspector rejected the claim because
       the heating system lasted 1 heating season.

    -- A homeowner was notified that his claim for replacing
       the roof on his home was not eligible for reimburse-
       ment because the roof was acceptable at the time of


                            14
      the original appraisal. The nspector rejected the
      claim because he considered the roof replacement as
      deferred maintenance. The roof was replaced less
      than 1 year after purchase of the home.

HOMEOWNERS NOT ALWAYS INFORMED
OF RIGHT TO APPEAL

     while homeowners have always had the right to appeal
their disapproved claims, they have not always been informed
of this right. In August 1975 an appeal clause that had
been part of the Chicago area office's disapproval letter
was deleted as a result of the development by HUD headquar-
ters of a common acceptance/rejection letter designed to
reduce the number of forms required in claims processing.
The clause was reinstated by Chicago in April 1976.

     During the 8 months in which the appeals clause was
absent, the Chicago area office made no attempt to advise
nomeowners whose claims were disapproved of their right to
appeal. Area office officials were of the opinion, however,
that Chicago community organizations had adequately publi-
cized the right to appeal rejected sec'ion 518(b) claims.
They also believed that the 8-month deletion of the clause
from the form letter had no effect on the number of appeals
received by their office.

CONCLUSIONS
     Homeowners in the Chicago area who have submitted sec-
tion 518(b) claims have not been cor.sistently treated in a
fair and equitable manner. Because the criteria used are
vague in terms of identifying what constitutes an eligible
defect or how to determine that the defect existed at the
time of insurance commitment, officials of the Chicago area
office have been forced to exercise considerable judgment
in evaluating claims.

     As a result many of the claims initially rejected have
been reevaluated during the appeal process and subsequently
approved--not because there now exists a better set of cri-
teria with which to make such decisions, but because the
decisions are still very subjective ones, and there now
appears to be a more liberalized acceptance by the Chicago
area office of section 518(b) claims. This is evidenced
by the successful appeal rate of 45 percent and is illus-
trated by many of the examples in this chapter. The
lengthened time-limit criterion used by the Chicago area
office also supports this contention.

     Those homeowners who have appealed their rejected
claims in the Chicago area have been quite successful, and

                             15
a question arises as to whether other homeowners who have
not appealed may not have equally valid claims.  Many of
the rejected claims which have not been appealed appear
very similar in circumstance to those successfully appealed.

RECOMMENDATIONS

     To bring about more objective and consistent evaluation
of a homeowner's claim for assistance under the section 518(b)
program nationwide, the Secretary of HUD should direct

     --the development of more clearly defined criteria as
       to what constitutes a serious defect, and

     -- that the guidance provided to inspectors for deter-
        mining whether defects existed at the time of insur-
        ance commitment recognize the inappropriateness of
        relaying (1) solely on a fixed time limit without
        giving due regard to the  ther factors of each case
        or (2) on the original FHA appraisal.

     In Chicago we rconmend   that the Secretary direct the
area office to

     -- discontinue using a fixed, time-limit criterion to
        the exclusion of other pertinent factors and, rather
        than relying on original FHA appraisals, be fair and
        objective, and resolve serious doubts in favor of the
        homeowner in evaluating claims, and

     -- reevalute all claims it has rejected on the basis of
        such inappropriate criteria.

AGENCY COMMENTS AND OUR EVALUATION

      In its letter of May 17, 1977, (see app. I) HUD dis-
agreed that more clearly defined criteria as to what consti-
tutes a serious defect need to be developed.   HUD stated
that the decision to give the benefit of any doubt to the
homeowner required guidelines that were not too restrictive.
It stated that claims determinations can only be made on a
case-by-case basis and are strictly judgmental.   HUD argued
that its guidance cannot reasonably be revised to include
all the varying situations that may have occurred and that
it is not practicable nor desirable to put such limitations
on the program.

     We agree with HUD's statements that the program's
guidance should not be too restrictive nor contain too many
limitations.  We do believe, however, that the guidance could
have been, and should be, strengthened to reflect the actual
experiences of the program in terms of what is an eligible


                              16
defect.   This would help to reduce the number of incidences
disclosed by our review where claimed defects, through sub-
jective judgments, were being rejected initially because
they were not felt to be structural or otherwise serious,
but were later being accepted during the appeal process.   It
Would add some objectivity to the determination process as
      as an element of consistency (which has otherwise been
     ing) within and among field offices as they consider
t.., merits of each claim.

     Regarding our recommendation that the guidance provided
to inspectors recognize the inappropriateness of relying
solely on a fixed time limit with little reqard being given
to anything else or on original FHA appraisals, HUD officials
informally advised us on June 13, 1977, that such guidance is
being drafted and will be provided to all HUD field offices.

     HUD stated in its written comments that (1) the deter-
mination as to whether a defect existed at the time of in-
surance commitment is often a judgment factor and (2) it is
extremely difficult to describe how this determination
should be made.  HUD said that a time criterion is helpful
i- giving the homeowner every benefit of the doubt if it
can't positively be determined that the defect existed at
the time of commitment.  HUD indicated that the time factor
is something it considers completely flexible and which must
be used in conjunction with all circumstances of each case.

     Regarding our recommendation that the Chicago area office
should be directed to discontinue using a fixed, time-limit
criterion to the exclusion of other factors and relying on
original FHA appraisals in evaluating claims, HUD stated
that since there never was a preset time criterion, the
Chicago area office will be instructed to cease using one.
HUD also stated that (1) the use of the original appraisal
to substantiate the fact that a defect did not exist at the
time of insurance commitment is unacceptable and (2) the
practice was noticed at the time its staff was reviewing
appeal cases.  HUD said that many cases were returned so
that this could be rectified.

     HUD agreed to instruct the Chicago area office to re-
examine all claims which were found invalid because of the
inappropriate use of a time criterion or use of the original
appraisal.




                            17
                              CHAPTER 3
          VALID HOMEOWNER CLAIMS NOT FULLY REIMBURSED

      Homeowner claims in the Chicago area are not being
 fully reimbursed under the section 518(b) program because,
 contrary to HUD procedures, average replacement costs from
 a "cost data book" are being used by the area office
 determine such reimbursements. HUD guidelines state to
                                                      tnat
 the homeowner should be reimbursed for the actual costs in-
 curred. Of 54 claims we reviewed which had been processed
 for payment, 21, or 39 percent, were found not to have been
 reimbursed in accordance with existing guidelines.

INCORRECT COMPENSATION
OF-CAGO Ho-iW'NERS

     Once a claim has been determined       alid, section 518(b)
procedures state that:

     "The homeowner will be reimbursed for all costs
     actually paid and found to be reimbursable not-
     withstanding the fact that the work could have
     been done at a lower cost."
The procedures also state that where the homeowner's claim
is in excess of any reasonable amount proper for the work
performed, the claim will be forwarded to HUD headquarters,
together with the facts of the case, for determination.
                                                          In
addition, the procedures also specify that financing charges
(including interest incurred by the homeowner in correcting
an el-    e defect) are a reimbursable cost under the pro-
gram.

      To test the HUD Chicago area office's implementation
of tne    procedures, we reviewed 54 of the approximately
1,200 .ims processed for payment as of July 1976. The 54
claims selected for review included (1) all 31 which, to
that point in time, had been reconsidered valid and for
which a voucher had been prepared, and (2) an additional
claims, which were randomly selected from those i itially 23
determined valid. The area off'ce incorrectly determined
the reimbursabil amount for 21 of the 54 claims as shown
below.

Tyee_of error        Number         Total amount         Average
Underpayment             18               $5,278
Overpayment                                               $293
                          3                   75            25



                              18
     The overpayments were due to clerical errors made in
computing the reimbursa.ble amounts. The underpayments
occurred because HUD area office personnel did not:

     -- Reimburse the actual costs incurred. The area office
        director provided written instructions to his person-
        nel to use a cost data book to calculate the reimburs-
        able amount for a given claim. The cost data book is
        furnished to members of the area office's underwriting
        staff for estimating replacement costs for building
        improvements when processing applications for mortgage
        insurance. The book lists the average price for re-
        placing or repairing an item in the Chicago area.
        Beeause the book lists the average price, the actual
        cost incurred by the homeowner may be over or under
        that amount. The area office, however, considered
        this a reasonable method for determining reimbursable
        amounts. We were also advised by area v2fice offi-
        cials that claims for which full reimbursement had
        not been made were not forwarded to HUD headquarters
        as prescribed in the regulations because they believed
        the area office had authority to make the final deci-
        sions.

    -- Fully reimburse homeowners for finance charges for
       claims processed for payment after August 1975. Ini-
       tially, HUD p..cedures did not allow homeowners to be
       reimbursed for ny finance charges they incurred in
       correcting covered defects. In August 1975, however,
       HUD headquarters directed the Chicago area office to
       begin reimbursing finance charges.

     The following two examples illustrate underpayments re-
sulting from the Chicago area office's failure to follow
prescribed procedures.

    -- One homeowner incurred a cost of $994 in replacing
       the heating system in his home ($915 for che heating
       unit plus $79 in finance charges). From the cost
       data book, the area office determined the reimburs-
       able amount to be $609 including finance charges.
       The homeowner was reimbursed this amount, which is
       $385 less than the cost actually incurred.

    -- Another homeowner incurred a cost of $1,301 to re-
       place the heating system in his home. Of the total
       amount, $1,020 was for the heating unit, and $281 was
       for finance charges. Again, using the cost data book,
       the area office determined the reimbursable amount to
       be $852, which is $449 less than the correct amount.
       The homeowner was reimbursed $852.


                            19
       In July 1976 we orought the 18 underpayments disclosed
 by our review to the attention of Chicago area office
                                                         offi-
 cials.   They acknowledged that underpayments had occurred
 and agreed to further reimburse all the claimants
                                                    except
 one who had been underpaid only by an insignificant
                                                      amount
 ($9.57).   As of June 24, 1977, 12 of the homeowners had
 beer paid the additional amounts, and vouchers for
                                                     payment
 had been prepared for the remaining 5.

      In July 1976 Chicago area office officials said that,
as a result of our review, they are forwarding claims
                                                       to
HUD headquarters when the amount of reimbursement
                                                   is in
question.   They also indicated a willingness to review the
accuracy of all claims processed by their office
                                                  to date,
provided that sufficient staff is made available
                                                  for this
purpose by HUn headquarters.

CONCLUSIONS

     The Chicago area office has not always
scribed procedures in reimbursing homeowners followed pre-
                                              for costs in-
curred in correcting covered section 518(b) defects.
stantial percentage of claims exist where total actual A sub-
                                                        costs
(including finance charges) incurred by homeowners
                                                    have not
been reimbursed.  Further, until recently, the area office
had not forwarded claims to HUD headquarters for
                                                  determina-
tion where there was some question as to the reasonableness
of the costs incurred by the homeowner.

      If HUD beliedes that its current procedures authorizing
reimbursement on the basis of costs actually incurred
                                                       is tie
most appropriate approach, such procedures should
                                                   be imple-
mented in a uniform and consistent manner by the
                                                  Chicago
area office.

RECOMMENDATIONS

     The Secretary of HUD should direct the Chicago area
office to pay all future section 518(b) claims in
                                                   accordance
with established procedures and reevaluate all claims
                                                       paid
to date in terms of such procedures. Also, because
                                                     of our
findings in Chicago, the Secretary should assure
                                                  herself that
other HUD field offices are making 518(b) paymerts
                                                    in accord-
ance with established procedures.

AGENCY COMMENTS

      In its comments on this teport, HUD agreed that pre-
scribed procedures for fully reimbursing homeowners
always been followed.                                had not
                        HUD concurred that the Chicago area
orfice should be directed to pay all future claims
                                                    in


                             2U
accordance with established procedures and that all claims
previously paid should be reevaluated to assure that the
reimbursement was an equitable one. Although HUD expects
such a reevaluation to take a substantial length of time to
complete with the present staff, it said that supplemental
vouchers will be issued to any homeowners who were previ-
ously reimbursed less than the amount they actually paid.

     HUD also stated that a notice will be prepared relative
to the problem of section 518(b) reimbursements and that it
will be distributed to all field offices.




                            21
       APPENDIX I                                                          APPENDIX I



  i.* tDEPARTMENT
       *    5                            OF HOUSING AND URBAN DEVELOPMENT
                                           WASHINGTON, D.C. 23410

                                            May 17, 1977

OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER                                          IN REPLY RIIEFE   TOI




        Mr. Henry Eschwege
        Director, Community and Economic
          Development Division
        United States General Accounting Office
        Washington, . C. 20548

        Dear Mr. Eschwege:

             Your letter of February 11, 1977, addressed to the Secretary
        of Housing and Urban Development transmitting a proposed report to
        the Congress entitled: "The Need to More Fairly Treat Homeowner
        Claims for Defects in Existing Insured Homes," has been referred
        to me for reply.
             I will answer the recommendations in the order that they were
        presented.

                Recommendation No. 1: To insure a more objective and consistent
                evaluation of a homeowner's claim for assistance under the
                Section 518(b) Program, the Secretary of HUD should direct
                the development of more clearly defined criteria as to what
                constitutes a serious defect.

                                        (See GAO note,        p.    25.]

                Rep ly:

                The statute is very specific and restrictive and, consequently,
                implementing instructions were very difficult to develop. The
                pros and cons of the specificity of the guidelines were discussed
                at great length, and on many occasions, during the development
                of the operating instructions. The decision to give the benefit
                of any doubt to the homeowner required guidelines that were not
                too restrictive. For example, a defect of a rotted porch raises
                the question to what degree was the porch rotted at the time of
                the appraisal so as to create a threat to the life or safety of
                the occupant.


                                                    22
APPENDIX I                                                  APPENDIX I


  A porch in such a condition, if the house were appraised in 1968
  or 1969, would not have still been in existence in 1975 when the
  518(b) nspection may hve been performed. Similarly in the case
  of a worn-out roof, If the roof were in such a condition in 1968,
  when finally Inspected in 1975 there would have been nothing left
  to inspect. Therefore, it seems clear to us that such determira-
  tions can only be made on a case-by-case basis and are strictly
  judgmental.
   The guidance in the Handbook offered as examples of what may be
   considered eligible defects, !f all other criteria are met, cannot
   reasonably be revised to include all the varying situations that
   may have occurred. It is not practicable nor desi:ible to put
   such limitations on the program.
  The determination as to whether the defect existed at the time
  of commitment is often a udgment factor. It s extremely diffi-
  cult to describe how this determination should be made. A time
  criterion is helpful in giving the homeowner every benefit of
  the doubt, if the appraiser cannot positively verify that the
  defect existed at the time of the commitment.

   The time factor is something that we consider completely flexible.
   For example, in the case of a claim, for a defective furnace
   replaced three years after the appraisal, the homeowner may state
   the furnace was inoperable most of the time and provide repair
   bills, or other evidence, to document this fact. The homeowner
   also may state that due to the lack of funds and the inability
   to obtain a loan It was necessary to "make do" until such time as
   he could afford to replace the furnace. To deny such a claim,
   even though it was three years after the appraisal when the
   furnace was actually replaced, woulo be unfair and would not
   give the benefit of doubt to the homeowner.

   Recommendation No. 2:   The Secretary should direct the Chicago
   Area Office to

        --discontinue the use of inappropriate criteria currently
          being used in evaluating claims such as (1) the use of
          a time limitation and (2) reliance on original FHA
          appraisals, and

        --consider the need to reevaluate all claims rejected on
          the basis of such inappropriate criteria.




                                  23
APPENDIX I                                                APPENDIX I

  Reply:
  We addressed the use of a time limitation in the response to
  the first recommendation. Since there was never a preset time
  criterion, we will instruct the office to cease using one.

  The use of the original appraisal to substantiate the fact that
  the defect was not apparent at that time is unacceptable. This
  practice was noticed at the time that our staff was reviewing
  the appeal cases. Many cases were returned so that this could
  be rectified.

  We agree that the most equitable solution would be to reevalu-
  ate all the claims rejected on this basis. Accor,'ingly, we will
  instruct the Chicago Area Office to reexamine all claims which
  were found invalid because of an arbitrary time criterion or
  use of the original appraisal.

  Recommendatlon No. 3: The Secretary of HUD should direct the
  Chicago Area Office to ,ay ail future Section 518(j) claims in
  accordance with established procedures 3nd reevaluate all
  claims paid to date in terms of such procedures. Also, because
  of our findings in Chicago, the Secretary should assure herself
  that other HUD field offices are making 518(b) payments in
  accordance with established procedures.

  Reply:
  We agree that the pescribed procedures for fully reimbursing
  homeowners for costs incurred in correcting 518(b) defects were
  not always followed. This was brought to the attention of the
  office on the occasions of our program reviews and during the
  time of our review of appeal cases.
 We concur that the Chicago Area Office should e directed to
 pay all future Section 518(b) c!aims in accordance with estab-
  lished procedures. The homeowners should be fully reimbursed
 for the amount expended, rather than the amount derived from the
 cost data book, except where it is documented that an improve-
 ment was made to the equipment such as the installation of
 central air conditioning where none existed previously. We
 agree that all such cases should be reevaluated to asure that
 the reimbursement was an equitable one. The performance of
 a reevaluation of all the claims processed to date will require
 a substantial length of time to complete wth the present staff.




                                24
APPENDIX I                                                  APPENDIX I

   An examination of the vouchers issued   for reimbursement pay-
   ments will be performed. In any case    that the issued voucher
   is less than the amount actually paid   by the homeowner a supple-
   mental voucher will be issued so that   the homeowner will be
   fully reimbursed.

  A Notice will be prepared relative to the problem of 518(b)
  reimbursement and will be distributed to all the field off es.

                                Sincere lU




                                Ass stant Secret    y




  GAO note:    Deletion relates to recommendation in the
               draft report which has been revised in the
               final report.




                                25
APPENDIX II
                                                       APPENDIX II
                       PRINCIPAL HUD OFFICIALS

                    RESPONSIBLE FOR ADMINISTERING

              ACTIVITIES DISCUSSED IN THIS REPORT

                                              Tenure of office
                                           From               To
SECRETARY OF HOUSING AND URBAN
  DEVELOPMENT:
    Patricia R. Harris                 Feb.    1977
    Carla A. Hills                                     Present
                                       Mar.    1975    Jan. 1977
    James T. Lynn                      Feb.    1973
    George W. Romney                                   Feb. 1975
                                       Jan.    1969    Feb. 1973
ASSISTANT SECRETARY FOR HOUSING-
  FEDERAL HOUSING COMMISSIONER
  (note a':
    Lawrrnce B. Simons                 Mar.    1977
    John T. Howley (acting)                            Present
                                       Dec.    1976    Mar. 1977
    James L. Yung                      June    1976    Dec. 1976
ASSISTANT SECRETARY FOR HOUSING
  PRODUCTION AND MORTGAGE CREDIT-
  FHA COMMISSIONER (note a):
    David S. Cook                      Aug.    1975    June    1976
    David M. DeWilde (acting)          Nov.    1974    Aug.    1975
    Sheldon B. Lubar                   July    1973
    Woodward Kingman (acting)                          Nov.    1974
                                       Jan.    1973    July    1973
    Eugene A. Gulledge                 Oct.    1969    Jan.    1973

a/On June 14, 1976, HUD combined the functions
                                                f
  ant Secretary for ousing Production and Mortgagethe Assist-
  FHA Commissioner ad the Assistant Secretary for Credit-
                                                   Housing
  Management under a single Office of Assistant Secretary
  for Housing-Federal Housing Commissiorer.




                               26